Credit Quality Shows Signs of High Quality

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(Bloomberg) — In 2022, after the Federal Reserve began raising rates at its fastest pace in decades, blue-chip U.S. companies vowed to begin reducing their debt. Those days may be over now.

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BBB-rated companies increased their share buybacks in the latest quarter for the first time since the start of 2023, and accelerated the growth of their capital expenditures after a five-quarter slowdown, according to strategists at Barclays Plc.

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Equity growth has also accelerated, strategists including Dominique Toublan and Bradford Elliott wrote in a note Friday. Currently, interest costs are rising faster than the critical ratio of income.

Put it all together, and it looks like companies are becoming more shareholder friendly and less bondholder friendly.

“While there are no signs of imminent pressure, it appears that the key picture has passed the peak of this credit cycle,” strategists wrote on Friday, with fragile investment-grade companies shifting from “prudential balance sheet management” to shareholders. payments and capital expenditure acceleration.

Bond investors have been snapping up debt all year, sending rates to near-decade highs and leaving the spread of investment-grade corporate bonds the closest they’ve been since the 1990s. The Barclays analysis emphasizes how the market price can be separated from the underlying credit picture.

That doesn’t mean a big selloff is going to happen anytime soon. Earnings are still relatively strong. Companies at risk of falling into the lower category of ratings, therefore equivalent to the credit grades of A- and BBB, have generally reduced their credit levels, according to Barclays strategists.

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For corporate bonds to weaken significantly, corporate financial conditions would have to continue to worsen, and demand for securities would have to decline significantly, said Seamus Ryan, director of credit research at GW&K Investment Management.

“To see a price reset from here, I think we need a catalyst,” Ryan said.

Torsten Slok, chief economist at Apollo Global Management, sees credit fundamentals remaining strong and continuing to help drag down earnings, he wrote in a paper earlier this month. But since rates are already high, especially for less liquid corporate bonds, it makes sense for investors to switch to more liquid corporate or less liquid private debt.

One of the reasons for the increase in capex is artificial intelligence, which requires large investments by ancillary and energy companies, many of which have BBB ratings. Another potential source of balance sheet volatility is the expected influx of mergers and acquisitions given incoming US President Donald Trump’s business agenda, with trade-offs likely to increase corporate power.

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“Signs of rising animal spirits are already there,” wrote Toublan’s team at Barclays. “We think that next year we are preparing to advance these methods.”

Production note: Credit Weekly will return on Jan. 4.

Review Week

• The Federal Reserve cut rates by a quarter percent and said it was slowing the pace of future cuts, unsettled risk markets. US junk-bond yields hit their highest level since August. The high rate spread reached its widest level since late November.
• Wall Street firms are debating whether sales of high-quality US corporate bonds could hit a record high in 2025, with just over $1 trillion of notes due to mature.
• Private credit firms are looking for more than corporate loans. The largest are laying the groundwork for financing everything from auto loans and mortgages to chip manufacturing and data centers in an effort to grow the market size by billions.
• Consolidated bond issuance in the US hit a record $35.6 billion this year, and analysts predict it will rise 7% to a new high by 2025. These are the types of bonds CVS Health Corp. sold at the beginning of December – they have features of both debts. and equality.
• Distressed Hong Kong real estate company New World Development Co. has fallen sharply to record credit markets, as concerns mount over its ability to offer credit beyond peers.
• Apollo Global Management said the growing segment of private equity is already a $20 trillion industry and that the overall market could reach $40 trillion in the next five years.
• Party City Holdco Inc. plans to file for bankruptcy in the next two weeks, a process that could lead to the liquidation of its stores.
• Big Lots Inc. expects to complete the planned sale of its business to private equity firm Nexus Capital Management LP, putting the discount retailer that employs more than 27,000 people at risk of liquidation.
• Swiss Re AG, Tokio Marine Holdings Inc., AXIS Capital Holdings Ltd and AXA SA are among the insurers risking the $3 billion debt of the World Bank Group’s private arm, as it aims to expand its lending to developing countries. in economics. .
• Italy’s Ferrovie dello Stato Italiane SpA is set to receive a 2 billion euro ($2.1 billion) loan from Intesa Sanpaolo SpA, which will help the state-run rail operator finance repairs and strengthen its infrastructure.

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On a trip

• Blackstone Inc. hired Andie Goh, who recently joined Ares Management, and Jack Ervasti, from KKR & Co., to oversee investment-grade deals as the world’s largest asset manager continues its expansion into private debt.
• Barclays Plc has hired Bjorn Andersen, the lender and high-yield bond holder, from Nordea.
• Former Silver Point Capital manager Manjot Rana is joining insurer National Life Group to launch a private equity offering.
• Credit Agricole SA has appointed Olivier Gavalda to replace outgoing Chief Executive Officer Philippe Brassac
• KKR & Co. hired Yoshi Takemoto as managing director to lead the company’s Global Wealth Solutions platform in Japan.

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